Using Philosophical and Economic analysis to consider big questions, world issues and matters of everyday life!

Monday, 15 May 2017

A Popular Idea, But A Bad One

We all know really why Jeremy Corbyn is a Brexiter in a Remainer's clothing - it's because he wants our nation to undergo a
prodigious re-nationalisation program, and he sees the Brussels Eurocrats as being
an impediment to this (one of the few good things about the EU is they prohibit
European nations from nationalising, subsidising and bailing out their own
interests, as it is, rightly, seen as being inimical to competition from
outside industries). Apparently some of Corbyn's nationalisation plans (like the nationalisation of the railways) are proving hugely popular. Now, while I've written before
about the imprudence of nationalised industry in the specific sense (see here
and here), and while I have numerous blogs on the benefits of the private sector over
the public sector (if you were ever inclined, all of them can be seen by
clicking on this Private
Sector vs. Public sector tab), I probably haven't written a blog post that
swiftly points out why generally speaking nationalised firms are worse for us
than non-nationalised ones.

A good place to start here
is to remind you of Milton Friedman's famous dictum regarding the four ways to spend
money:

“There are four ways in which you can spend money. You
can spend your own money on yourself. When you do that, why then you really
watch out what you’re doing, and you try to get the most for your money. Then
you can spend your own money on somebody else. For example, I buy a birthday
present for someone. Well, then I’m not so careful about the content of the
present, but I’m very careful about the cost. Then, I can spend somebody else’s
money on myself. And if I spend somebody else’s money on myself, then I’m sure
going to have a good lunch! Finally, I can spend somebody else’s money on
somebody else. And if I spend somebody else’s money on somebody else, I’m not
concerned about how much it is, and I’m not concerned about what I get. And that’s
government. And that’s close to 40% of our national income.”

Now, given that
politicians have certain popularity-gathering incentives to spend taxpayers'
money well, you'd think they might have constant mindfulness of appearing to
the public to be prudent spenders. In a small sense this is true, yes - but
what you have to remember is that due to asymmetry of information, short
memories and copious amounts of spin, the relationship between a government's
achievements/mistakes and the public's perception of them is pretty opaque and
obfuscated - which is precisely what politicians and civil servants love.

If you’re spending someone
else's’ money on someone else, as the government does with its various
'investment' schemes (which are rarely investments actually, they mostly mean 'costs') then the motives
are likely to be less prudent than if you’re spending someone else's’ money on
yourself. But both pale in comparison to if you spend your own money on
yourself, which is what private businesses do, and because of which they have a
better nose for efficiency, targets and outcomes.

The private sector is
astronomically more competitive, because it has to forecast future demand and
attract funds competitively. That's why public sector projects are far more
notorious for cost overruns, being overstaffed, and for costly time delays.

That is why, apart from
government spending that helps the needy and most vulnerable in society, low
levels of state spending make society better off. Private investors are
generally more prudent because it is their own money at risk, whereas the
public sector corresponds to the fourth quarter of Friedman’s quadrant: they
spend other people’s money on others far more recklessly. And while we're at it, the national beef with
big business is a strange one too. Quite often goods and services are produced
more efficiently when they are produced large-scale. A firm might be able to
make 50,000 burger meals in less than twice the time it takes a smaller firm to
make 25,000. Trading small-scale often reduces the extent to which comparative
advantage takes effect. Bob's metal firm can spend 3 days making 10,000 hooks,
and Jim's carpentry firm can spend 3 days making 2,000 varnished boards,
whereas one firm making both may take 8 days to produce that quantity.

A firm is said to be a
more effective trader if it can produce a good or service at the same quality
but at a lower cost than its competitors. And the benefits to society occur
when as many firms as possible specialise in their field of comparative
advantage and use it to trade. Therefore, it's usually the case that the country's
biggest firms are the ones providing the most value for consumers, as well as
being the biggest job creators. To end, here's a thought experiment. Imagine if
you pulled 30 people off the street in a random fashion, took them to an
airfield, showed them all the parts of a Boeing 747 and asked them to work out
how to build the plane from scratch. These non-experts would be clueless
regarding how to assemble those proprietary parts - and the take home lesson
would be: don't leave big and important jobs in the hands of amateurs, which is
exactly how we should feel about our politicians and our economy.

About Me

This is the Blog of James Knight - a keen philosophical commentator on many subjects.
My primary areas of interest are: philosophy, economics, politics, mathematics, physics, biology, chemistry, theology, psychology, history, the arts and social commentary.
I also contribute articles to the Adam Smith Institute and the Institute of Economics Affairs.
Hope you enjoy this blog! Always happy to hear from old friends and new!
Email:j.knight423@btinternet.com